Productivity, in economics, relationship between output and input, the output being goods and services, the input the factors of production (resources such as land, capital, and labour) used to produce those goods and services. In common usage, productivity generally refers to labour productivity: output per worker, output per worker hour, or some other yardstick. It is usually measured using index numbers (relating to, for example, output and worker hours) to give the ratio of change in productivity. The most reliable data comes from manufacturing industry; it is easier to measure the output from a production line than it is from, say, a financial services business. Maximizing productivity is the key to economic success. It is total factor productivity that should be focused upon and not just labour. Increasing capital inputs (investing in machinery) in order to reduce labour inputs (and therefore increase labour productivity) should be done with the aim of increasing total factor productivity. In practice, total factor productivity is difficult to calculate because it is hard to determine what the contribution of individual inputs is in respect of changes in output. Furthermore, those inputs do not remain constant but vary over time. Because of the difficulties of measuring productivity accurately, the statistics relating to it should be interpreted with care. Short-term improvements in productivity indices may reflect capacity utilization rather than a real trend. In general, strict comparisons should not be made between countries because methods of computing productivity data vary from one country to another.
Wage increases are often linked to productivity. Many firms operate a system of performance-related pay, whereby at least part of workers’ pay is calculated according to how productive they have been. It has also become common for companies in wage negotiations to say that pay rises can only be justified by equivalent increases in productivity; this is often taken to mean that at least to some extent any wage increase will have to be funded through job losses.